Statesville Blues: Are Cross and Shield Restraining Competition?

If you live or work in North Carolina, chances are Blue Cross Blue Shield NC is your health insurer. And chances also are that, as you’ve watched your premiums continue to rise, you’ve found few if any other insurers who can give you a better deal.

There aren’t many.

According to the American Medical Association, in its annual survey of health insurance markets across the country released in late November, BCNBS-NC continues to outpace its competition here.

In 2010, the company held the largest share of the commercial health insurance market in the state, at 48 percent. That share rose to over 50 percent in several metropolitan areas: in Goldsboro and Greenville, it was 75 percent; Rocky Mount, 66 percent; and in the Hickory-Morganton-Lenoir area, 64 percent. The company had the lowest share in the Charlotte area, at 33 percent.

And when broken down by product, the company’s market share for preferred provider coverage in N.C. shot up significantly, to 76 percent, placing it at number eight among the top ten least competitive PPO markets.

The company’s dominance is the result of hard work and unrivaled service, says BCBS-NC spokesman Lew Borman.

“We’ve worked very hard to build membership, both group and individual, and we’ve been in some parts of the market for really a very long time, when others wouldn’t go there. People are choosing us because of our reputation and because we listen to their needs. It’s really not much more than that.”

But others beg to differ.

The Justice Department has been looking into whether Blue entities here and elsewhere have used anticompetitive practices to maintain their dominant market share.

And in a series of class action lawsuits filed in federal courts here and in other states, BCBS insureds have accused the companies of illegally dividing up health insurance markets in restraint of trade and are seeking to recover the millions in artificially inflated premiums they say have resulted.

They are lawsuits which, if successful, may finally bring meaningful competition to regional health insurance markets, according to Duke Law School antitrust professor Barak Richman.

“They come at a time when we’re also trying to figure out how to implement the Affordable Care Act, and the terrain is very uncertain,” he said. “All of these events could lead to a very different health insurance market.”

Divide and conquer

In Cerven v. Blue Cross and Blue Shield of North Carolina, filed in February in federal court in Statesville, a group of individuals and businesses allege that BCBS-NC, its national affiliate, Blue Cross and Blue Shield Association, and 37 other BCBS entities across the country unlawfully agreed not to compete with each other.

“Historically, the Blue Cross plans [which covered hospital services] and Blue Shield plans [which covered physician services] were fierce competitors,” plaintiffs contend. “During the early decades of their existence, there were no restrictions on the ability of a Blue Cross plan to compete with or offer coverage in an area already covered by a Blue Shield plan. Cross-on-Cross and Shield-on-Shield competition also flourished.”

But over time, in the face of non-Blue competition, the groups consolidated by Cross and Shield plans and then within their respective states to become one plan, today operating in 38 distinct state markets. Together they form the membership of the BCBS Association – the vehicle through which, plaintiffs allege, the plans have agreed to divide up the nationwide health insurance market among themselves and eliminate competition.

Those agreements, along with other anticompetitive practices, enabled the Blues to dominate the health insurance markets in their respective states, driving up consumer health care costs and premiums in the process, while giving the company a $1.4 billion surplus, according to the complaint.

In response, BCBS-NC has asked the court to dismiss the case, arguing that any agreements between the Blue entities are permissible because they are each a licensee of Blue Cross Blue Shield Association — not separate competitors — and that in any event their actions have not had any anticompetitive effects.

While the parties battled it out in Statesville, similar class actions against Blue entities began popping up in other states; there are now at least 20 cases pending in federal courts across the country – seven of them in Alabama.

In September, plaintiffs in one of the Alabama actions asked the Judicial Panel on Multidistrict Litigation to centralize all the cases in Birmingham federal court for purposes of efficiency. Plaintiffs in the North Carolina case and others have opposed that request, saying that each action turns on state-specific regulation that would be better interpreted by judges in their respective states.

The MDL panel heard argument on the request last week but has yet to issue a decision. In the meantime a decision on BCBS’s motion to dismiss here has been stayed.

Setting the floor on pricing

The lawsuits come at a time when Blues across the country are under attack for their use of “most favored nation” clauses, which require providers to charge other insurers as much or more for services than they would charge a BCBS group. Critics say that the MFNs effectively allow BCBS to set the floor on pricing, undercutting other insurers and eliminating them from the market.

Here, plaintiffs contend that BCBS entities were able to maintain their market shares by using these MFN clauses in their agreements with providers:

“The use of MFNs unreasonably reduces competition by establishing that the dominant market provider will be charged the lowest prices charged, thus making it indifferent to the actual price charged and eliminating an incentive to reduce overhead prices, and by preventing other health insurers in North Carolina from achieving lower costs with providers and thereby becoming significant competitors to BCBS-NC,” plaintiffs said in their complaint.

In October 2010, the Justice Department sued BCBS-Michigan, contending that the plan’s use of MFNs forced competitors from the market and led to higher premiums and higher health care costs paid by insureds. That case is still pending.

And in the spring, 2011, the Department sent out civil investigative demands to a number of state BCBS plans, including BCBS-NC, seeking information about the use of those provisions.

Neither Borman nor Justice Department officials could comment on the status of that investigation.

State legislators here also targeted the use of MFNs. In April 2011 Sen. Tom Apodaca, a Republican from Hendersonville, sponsored S-517, which would ban the use of MFNs in agreements between providers and health insurers. The bill passed in the Senate and was sent to the House Judiciary Committee, where it remained at the end of the session in 2012.

Although the Blue’s use of MFNs has drawn the attention of regulators, it’s only part of what Richman calls a very compelling complaint.

“Certainly if you have a monopolist that’s using MFNs, it’s discouraging entry into the market,” he said.

“But here, what the plaintiffs are saying first is that these individual Blues have divvied up the national marketplace, and in doing so are not competing with each other when really they should be. That’s the primary agreement.”